It’s a cute,
quirky culture the company has built from modest roots—the now-famous hot-dog
stand in Madison Square Park—into an international phenomenon, in 12 short
years.

Of course, 12
years in today’s world is actually a long time, but things didn’t get serious
until 2004 when the first Shake Shack restaurant opened, starting the launching
pad that would shoot the rocket ship into orbit following the wildly hyped IPO
just 16 months ago to the point where, by the end of the
first quarter, there would be 88 such “Shacks,” with an inordinately large number—36 to be
exact—licensed to other operators outside the U.S., mainly in the Middle East.

And it is towards
that Middle East exposure we turn our attention here, since Wall Street’s
Finest haven’t bothered—and anything Wall Street’s Finest don’t bother with is
always interesting to this virtual column.

Not so long ago—in
the July 2015 S-1, for the record—SHAK described the Middle East as “our most prominent growth
market.”

And the Middle
East clearly was the prominent growth
market at that point, having seen 49.7% licensing revenue growth in the fourth
quarter of 2014.

But by the first
quarter of 2016 that growth rate had throttled down to 14.3%.

What happened to
SHAK’s “most prominent growth market”?

Here’s what
management said on the recent earnings call:

“Now, while the Middle East remains a very
important market and part of our international footprint, we are
experiencing softness in sales there this year, particularly in our mall
locations throughout energy-dependent markets that are seeing a natural
economic slowdown right now coupled with currency headwinds. So we expect
sales in our Middle East Shacks to remain under pressure through this year
given the macro environment in the region.”

Not too long ago—i.e.
last summer, around the same time as the aforementioned S-1—the company was describing the Middle East in far rosier terms:

“When
we had just opened the secondShakeShackon
the Upper West Side of New York, Mohammed Alshaya, probably many of you know
Alshaya, from the Middle East, came to us and said, I don't normally do this.
I normally go with much bigger brands here, and I know you only have two, but
I thinkShakeShackwould do tremendous in the Middle
East and I want to bring you over. And Danny and Randy kind of looked at
each other and shook their heads, but out of pure curiosity got on a
plane and went to Dubai, saw the way Alshaya operates, saw how they do
things, saw how their culture connects with ours and said, you know
what, let's take a chance, let's do it. So they opened aShakeShackin the Mall of the Emirates in Dubai
and it was one of the leading restaurants in the system and still is at
this time.”

Alshaya is,
indeed, a legit operator, and they do indeed normally go with bigger brands.They’ve
opened Cheesecake Factories and Pottery Barns, and they know how to do it.

But Cheesecake
Factory and Pottery Barn took their time on the whole opening-a-zillion-stores-overseas thing.

Specifically, it took Cheesecake Factory 35 years before they opened
their first restaurant overseas, in Dubai, with Alshaya in 2012—and the company
spent a lot of time getting ready.

After all,
Cheesecakes in Dubai can’t serve alcohol or sell pork products, so the menu had
to be adjusted and the company’s culture had to be transported all the way from
Calabasas Hills to the United Arab Emirates.

Today Alshaya
operates just 9 Cheesecakes, compared to the couple-dozen-plus Shacks it opened with a
bang not so long ago.

And while Cheesecake
has let it be known, most recently in March, that its international units
continue to do well, SHAK said on its recent call the Middle East market is already “maturing...quite a bit” as it switched the focus to new licensees in Asia:

“If you look at our guidance of seven Shacks
all year here for that, the Middle East has got quite a few restaurants
there. Our region is maturing for Shake Shack quite a bit. We have some
great opportunity. We just opened in Riyadh and doing really well there.
As I've said, in Bahrain and Oman. So we fully expected that region
to mature a little bit.”

From “our most
prominent growth market” to a “maturing” region in less than 12 months might be
a record.

Not the record a growth
company wants to hold, but a record nonetheless.

The content contained in this blog represents only the
opinions of Mr. Matthews.Mr. Matthews
also acts as an advisor and clients advised by Mr. Matthews may hold either
long or short positions in securities of various companies discussed in the
blog based upon Mr. Matthews’ recommendations.This commentary in no way constitutes investment advice, and should
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